In the winter of 2018 the Government of Saskatchewan hired consulting firm MNP to gather feedback on the Prairie Resilience Framework from Saskatchewan stakeholders. I offered my feedback in an engagement session in Regina and in a written submission. The final MNP (2018) Climate Change Engagement Report has just been released. I read through the report with interest and saw that some of the points I made were represented, while others were absent or subsumed within larger categories. In the interest of transparency and clarity here is the full written submission containing my feedback on the Prairie Resilience plan.

This submission was written with the goal of encouraging the Saskatchewan Government to fill in the gaps in their climate change plan. As I outline below I do not believe the plan as written offers a substitute for the federal government’s carbon pricing plan. To offer a substitute, Prairie Resilience would need to expand its policy coverage to the 50% of emissions in the province that are ‘unregulated’. This can be done with a suite of regulations and standards. It can be done most efficiently by putting a price on carbon.

Sincerely,

Brett Dolter, PhD

May 11, 2018

Prairie Resilience Framework Feedback

Brett Dolter, PhD

March 12, 2018

Prairie Resilience Framework Indicators

The Prairie Resilience framework contains a host of useful indicators. It is great to see a focus on riparian buffer zones and protection, encouraging pasture on marginal lands, and wetland preservation and restoration. Riparian buffer zones will contribute to enhanced recreation values for lakes and rivers. Grasslands and wetlands can be stores of carbon and habitat for wildlife. In general, this is a robust plan for preparing communities for climate change, and monitoring the state of natural systems.

I was glad to see measurement related to the transition to a zero-emissions economy appear under the ‘Transformative’ category heading. The following indicators stood out to me as particularly relevant:

Annual total GHG emissions from industrial facilities captured and used (p. 17);

Quantity of methane and related associated gases flared and vented per cubic metre of produced crude oil (p. 18);

Total annual GHG emissions by government owned buildings (p. 18);

% of workforce employed in the low-carbon economy (p. 23).

I encourage the Ministry of Environment to keep these indicators and report each of them annually to the public. An index may also be useful, but in the interest of transparency it would be best to report the levels of individual indicators.

For the purposes of monitoring the transition to a zero-emissions economy and keeping an eye on industrial competitiveness I would like to suggest several other indicators:

Energy per unit production: Similar to the indicator measuring “water used per tonne of potash produced” it would be useful to measure: energy (GJ) used per tonne of potash produced. Similar measures could be introduced for other industries such as oil and gas extraction (GJ/barrel and GJ/GJ), oil refining (GJ/barrel), uranium mining (GJ/tonne), agriculture (GJ/bushel). Measures like these will provide detailed information as to whether policies are improving the energy efficiency of production. They could be included as a reporting requirement for regulated emitters.

To make this indicator most useful, energy use (GJ) should be reported by type: natural gas, electricity, gasoline, diesel, other. This would allow easy conversion to calculate total production-related GHG emissions. It would then be possible to decompose changes to the GHG emissions intensity of production; for example it would be possible to determine whether fuel substitution or energy efficiency has lowered emissions. Whenever possible, gather disaggregated energy use data, which you can then aggregate as GHG emissions in public reporting.

As context, I am currently researching the impact of historic energy price changes on the competitiveness of the manufacturing sector. The goal of this research is to predict how carbon pricing might impact the future competitiveness of manufacturing. I am conducting the research using the ‘Annual Survey of Manufacturing’ at Statistics Canada. I have access to individual plant-level data on output and energy expenditures, but not energy in terms of a physical measure like gigajoules (GJ). This means a change in energy expenditures could be due to energy price changes or from changes in the quantity of energy used. The ambiguity makes analysis difficult. If energy expenditures fall we cannot tell if an industrial facility negotiated a better energy price from a supplier or whether the facility became more energy efficient. To avoid ambiguity it would be useful to track: energy use (GJ), greenhouse gas emissions (tonnes), energy intensity of production (GJ/units of output), and GHG intensity of production (GHG tonnes/units of output). It would also be useful to collect data on the prices that industrial facilities pay for electricity and delivered natural gas.

Competitiveness indicators: Saskatchewan will want to monitor and analyze how their regulatory policies have impacted the competitiveness of industries within the province. Ideally you would measure how the regulatory policies lead to changes in indicators of competitiveness such as employment, employment/unit of output, exports, and value-added. By anticipating the questions you would like to ask about the regulatory policies in the future, you can design the data collection process to provide the data that can answer those questions.

Transportation indicators: The Prairie Resilience plan speaks only to the government vehicle fleet and not vehicles owned by individuals and businesses in Saskatchewan (aside from a mention of a fuel efficiency strategy for freight vehicles). I propose that SGI and the Ministry of Environment monitor and report vehicle registrations by fuel-efficiency and vehicle type. A complete suite of indicators in the transportation realm would include:

The average fuel efficiency of cars, trucks, and cross-over SUVs registered in Saskatchewan;

The number of plug-in hybrid, and battery-electric vehicles registered in Saskatchewan;

Number and location of publicly accessible electric vehicle charging stations in Saskatchewan (level 2 or level 3) (tracked in partnership with SaskPower);

The number of trips taken on transit (tracked in partnership with municipalities).

These indicators would set a baseline for the fuel efficiency and emissions intensity of the Saskatchewan vehicle fleet, and would measure the uptake of zero-emissions vehicles, the accessibility of electric vehicle charging stations, and transit ridership.

Improving these indicators will require complementary policy to the existing Prairie Resilience regulatory approach. One promising policy is a zero-emissions vehicle (ZEV) mandate. Quebec became the first province to implement this policy effective January 2018. It requires automakers to earn a certain number of credits for selling zero emission vehicles within the province. If they do not earn enough credits, automakers can purchase credits from other automakers who have surplus credits (i.e. those that have sold more zero emissions vehicle than is required). Quebec’s ZEV mandate stringency tightens over time to require an increasing share of zero emissions vehicles sales. It offers a partial substitute to carbon pricing on gasoline and diesel by encouraging sales of zero emissions vehicles. (Note: the offset is only partial because it does not encourage mode switching to non-vehicle modes of transportation and does not encourage individuals or businesses to lower the number of kilometers travelled).

Net-zero homes and buildings in Saskatchewan: The adoption of the 2015 National Energy Code for Buildings ensures that investments will be made in new energy efficient homes and commercial buildings. It would be useful to track the impact that this regulation has on transforming the building stock. I suggest additional indicators to monitor progress in improving the building stock:

Energy performance of homes and buildings in terms of energy (GJ) per m2;

Number and percentage of net-zero ready and net-zero homes built in Saskatchewan;

Number and percentage of net-zero ready and net-zero commercial buildings in Saskatchewan.

Moving forward, it will be necessary to strengthen the building code. In the residential sector, this may be accomplished by working with the Saskatchewan Research Council (SRC) and the Home Builders Associations to demonstrate and incentivize the next generation of energy-efficient homes. Ten years ago, the Ministry of Environment provided $1000 incentives for homes built to R-2000, Energy Star for Homes, and EnerGuide 80 standards as part of its ‘Go Green’ funding. That level of energy efficiency is now made standard with the National Energy Code for Buildings. Incentives can now be offered for next generation net-zero, net-zero ready, and ‘Passive House’ standard homes in Saskatchewan. Following five to ten years of incentives the homebuilders should be prepared for a step-wise improvement in the regulations. By 2030 all new homes built in Saskatchewan should be net-zero or net-zero ready.

A similar incent-and-then-regulate approach can be taken in the commercial building sector.

Energy Efficiency Retrofits for Existing Homes and Buildings: Most of the existing homes and buildings in Saskatchewan will still be in use in 2050. To make progress on reducing GHG emissions in the buildings sector it will be necessary to improve the energy efficiency of existing buildings. A focus on the energy efficiency of government owned buildings should be extended to the Saskatchewan Housing Corporation (SHC). Energy efficiency retrofits to SHC housing can reduce energy bills and improve comfort and health. Indicators related to progress in this area would include:

For the province as a whole, the Government of Saskatchewan could work to ensure that programs offered by SaskEnergy can be accessed by low-income households. Often, the homes most in need of energy efficiency retrofits are owned by households lacking access to capital to carry out the retrofits. Related to this, the province could track:

Number of homes owned by low-income households that have carried out energy efficiency retrofits;

Annual energy savings from the retrofits;

Annual GHG emissions reduced by the retrofits.

I carried out research on this topic ten years ago and could provide a summary report upon request.

Revising Existing Indicators – There are a few indicators that I believe could be revised to better capture progress towards the resilience goals:

Area of wetlands created/restored – This would be better measured as total wetlands area, and could separate out i) wetlands lost, ii) wetlands restored, iii) wetlands preserved;

# of customers with Advanced Metering Infrastructure (AMI) – This indicator is listed as ‘Absorptive’. It could also be classified as ‘Transformative’.

# of new subdivisions and sites approved that meet flood protection standards – This indicator could be considered in context. What is the percentage of all subdivisions or sites that meet flood protection standards? That would cover existing areas.

# of swimming advisories in high-risk recreational areas – Evaluating this indicator poses a challenge. We would want reporting of unsafe conditions to be high (more advisories), but incidence to be low (fewer advisories), making it difficult to know which direction we would want this indicator to go.

Two Questions Related to Methane Monitoring

I was glad to see an indicator focused on methane emissions: “Quantity of methane and related associated gases flared and vented per cubic metre of produced crude oil.” I have questions regarding how the methane emissions will be measured and monitored.

Recent research has indicated that venting, flaring, and fugitive methane emissions are much higher than is reported in annual emissions inventories. For example, using mobile surveys, Atherton et al. (2017) calculated methane emissions of 111.8 kilotonnes (kt) per year in the Montney basin of British Columbia (BC) compared to reported methane emissions of 78 kt for the entire province of BC.[1]

What method will the Government of Saskatchewan use to monitor and measure methane emissions?

Improvements in methane management and methane emissions regulation must be accompanied by sufficient methane emissions monitoring and auditing capacity. The Province of Saskatchewan should invest in mobile methane monitoring units and new full-time methane emissions auditor positions to ensure effective methane emissions monitoring.

Performance Standards Equivalency with Federal Plan

The Prairie Resilience plan commits Saskatchewan to implement performance standards for regulated emitters with GHG emissions greater than 25 kt. In terms of compliance options, it is clear that to be in compliance with the federal government’s carbon pricing requirement the price of the provincial technology fund levy should be $10/tonne in 2018, increasing by $10/tonne per year to reach $50/tonne in 2022.

I support the exchange and trade of performance intensity credits, allowing facilities that exceed their target to sell credits to those facilities that have failed to meet their performance-intensity standard. The cost of credits would be set via negotiation between firms. This is a way to ensure cost-effective emissions reductions in the industrial sector and follows the logic of a cap-and-trade system. (See Appendix A for further explanation)

I would strongly discourage the use of offsets and internationally transferred mitigation outcomes as an alternative to paying the technology fund levy or purchasing performance standard credits generated by other regulated firms. Carbon offsets often do not meet the test of additionality. The key question to assess additionality is: would the person or business have taken the emission reduction action without receiving a carbon offset payment? If the answer is yes, the carbon offset has not led to an additional reduction in GHG emissions. This is particularly true in regard to the move to zero-tillage agriculture, which is carried out not to reduce GHG emissions, but instead to optimize soil moisture conditions and the use of fertilizer and chemical inputs. No offset credits should be given for zero-tillage farming practices initiated before the introduction of the Prairie Resilience framework.

If the Government of Saskatchewan does plan to credit agricultural producers with carbon offsets for adopting zero-tillage practices, it should take a whole systems approach to carbon offsets accounting. This means that account should be taken not just of acres in zero-tillage (which would count as a carbon credit), but also acres converted from pasture to cultivation and acres of drained and seeded wetlands (which should count as carbon debits because soil carbon is lost). To be credible, an agricultural offset system needs to have consistent rules applied across land use types.

In summary, to claim compliance with the Pan-Canadian Climate Change framework the performance standards should adopt the federal carbon price schedule for the technology fund levy; allow performance standard credit trading; and forego allowing carbon offsets as an alternative to paying the technology fund levy. If purchasing agricultural carbon offsets is included as a form of compliance, then the carbon offset accounting should also consider agricultural carbon debits – lost soil carbon due to land-use change – and should deduct carbon credits from landowners accordingly.

Greenhouse Gas Emissions Reporting for Regulated Emitters

To ensure consistency with federal government reporting, facilities emitting 10 kt or more should be required to report GHG emissions to the provincial government. If these facilities are reporting to the federal government anyways, there is no reason to make reporting to the province voluntary.

Equivalency for Unregulated Emitters

In 2015, there were 44 facilities emitting more than 50 kt of GHG emissions in Saskatchewan, and these facilities were owned/managed by 26 companies or institutions. Meanwhile, there were 40,453 small businesses (1-99 employees), 644 medium-sized businesses (100-499 employees), and 88 large businesses (500+ employees) in the province. Extending regulation to those emitting more than 25 kt of GHG emissions will increase the number of regulated facilities and companies, but regulated emitters will still be a fraction of the businesses registered in the province. For the Prairie Resilience plan to offer a true substitute for carbon pricing, policy must be put in place to encourage “unregulated emitters” to reduce GHG emissions. A carbon price would be the simplest method of providing this encouragement and ensuring compliance with the federal plan. Without a carbon price more effort must be made to ‘fill the gaps’ in the Prairie Resilience plan. What measures will be put in place to encourage GHG emissions reduction in facilities releasing less than 25 kt of GHG emissions?

Appendix A – Performance Standards and Strategic Negotiation

For an economically efficient outcome, performance standards should be set so that firms reduce emissions to the point where the marginal cost of reducing emissions for firm 1 equals the marginal cost of reducing emissions for firm 2.

I’ve illustrated a two-firm carbon market in the graphic below, which shows the marginal cost of emissions reduction for two facilities. Facility 1 reduces emissions as you travel from left to right on the x-axis. Facility 2 reduces emissions as you travel from right to left on the x-axis. In this example, the total cap on emissions is 25 units. Without a cap, each facility would emit 25 units of emissions for a total emissions level of 50 units. The firms have different cost structures. Facility 1 can reduce emissions at a lower cost than Facility 2. The efficient outcome is for Facility 1 to reduce emissions by 18 units and Facility 2 to reduce emission by 7 units (the gold star where the curves intersect). At this point the marginal abatement cost is equalized across the two facilities.

If instead, a performance standard was established that required Facility 1 to reduce emissions by 15 units and Facility 2 to reduce emissions by 10 units, then the marginal abatement costs between facilities would be quite different; the marginal cost of facility 2 (MC2) would be much higher than the marginal cost of facility 1 (MC1). This is where credits for exceeding a performance standard become important. Facility 1 could exceed its standard and reduce emissions by 18 units, and then sell 3 credits to Facility 2. Through negotiation you would expect the firms to agree to a credit price at a point near the equilibrium where MC1 = MC2. Facility 2 would save costs equal to area ‘a’ while Facility 1 would earn additional profit equal to area ‘b’. There would be a net gain from trade in the credit market. This flexibility is important to allow climate policy to achieve economic efficiency and provides the greatest ‘bang for the buck’ in terms of emissions reductions.

My understanding is that performance standards will be set following one-on-one meetings with industrial regulated emitters. One challenge is that the Government of Saskatchewan will not know how expensive it is for any given industry to reduce its GHG emissions. Government officials will rely on the statements made by the industrial emitters, but these emitters will have an incentive to overstate the cost of compliance. I’ve illustrated this issue in the graphic below, which shows Facility 2 claiming a higher marginal cost of abatement profile (curve MCclaim) than its true cost structure (curve MCtrue). By claiming a high marginal cost of abatement profile Facility 2 would be granted a less stringent performance standard target (in this case equivalent to a reduction of 7 units of emissions). Facility 2 could then capitalize on its superior negotiating tactics by exceeding the performance intensity standard and selling credits to Facility 1. We would again expect the two firms to negotiate a performance credit price at the level where MCtrue = MC1 (shown intersecting the blue star). Facility 2 would make a profit equal to area ‘b’ and Facility 1 would save on emissions reduction expenditures by an amount equal to area ‘a’. The result would still be economically efficient, but through deception in the negotiation process Facility 2 would receive windfall profits. This means that facilities will generally have an incentive to overstate abatement costs during the consultation process.

In a cap-and-trade system, an efficient, equalized marginal cost can be achieved through a permit auction. In an auction firms make bids that reveal their willingness to pay and their marginal cost structure. High cost firms will bid higher prices for permits. If permit prices are high, low cost firms can act to reduce emissions internally and avoid buying permits. The clearing price in the permit market is the carbon price that equalizes marginal abatement costs.

The difference between a cap-and-trade system and a performance based standard is a question of property rights. A cap-and-trade system is built on the assumption that the public, represented by government, have property rights over the atmosphere. The government then sells those property rights in a permit auction. A performance standard assigns the right to pollute to private firms up to the point where emissions reductions are required (i.e. the point where the performance standard is binding). While this can be an important method of protecting ‘energy-intensive trade-exposed’ (EITE) firms, not all regulated emitters will be in this category. The Government of Saskatchewan should think carefully about allocating the right to pollute for free to regulated emitters, and consider moving to a permit auction system for those firms that are not trade-exposed.

Climate change is an urgent problem. Getting off fossil fuels will be difficult. If you agree with these two statements, I’d invite you to consider my arguments in support of a third statement: Carbon pricing is the most effective way to reduce our greenhouse gas emissions. Here are ten reasons why:

Climate change is an investment problem not an environmental problem. To stop climate change, we need to invest in technologies and products that do not pollute. Carbon pricing makes dirty technologies more expensive and guides our investment choices.

The transition to a zero-emissions world will take time. Carbon prices can be slowly increased over time, allowing for clean energy investments to be made when equipment is old and in need of replacement. For example, if you just installed a new natural gas furnace, you can choose to wait 20 years before installing a new electric heating system. Carbon pricing does not tell you when to invest, but encourages you to make a smart, clean energy investment when the time is right.

Carbon pricing is not a punishment, it is a source of information. If you wanted to live a pollution free life without carbon pricing you would have a tough time. When you go shopping how would you know whether the apples you are buying were grown in a greenhouse heated by diesel fuel, or in a well-insulated greenhouse heated by clean electricity? With a carbon price in place, the apples grown in a diesel heated greenhouse would be more expensive. Carbon pricing provides information to help us sort between clean and dirty products.

Carbon pricing accounts for differences between polluters. In Canada, the carbon price will be $10/tonne starting in 2018. Businesses that find it expensive to reduce emissions can pay a carbon levy on every tonne of pollution they emit. Businesses that can reduce emissions for less than $10/tonne can reduce pollution and avoid paying the carbon levy. What this means is that all businesses will face the same cost for pollution: $10/tonne. It would be difficult to design a regulation that would achieve this level of fairness. In 2019 the carbon price will rise to $20/tonne, encouraging pollution reductions that are slightly more expensive. This progression means investments in low-cost “low-hanging fruit” will be made first, providing more “bang for our buck” in terms of emissions reductions per dollar. Because it leads to equal treatment of polluters and because it encourages the lowest cost pollution reductions first, economists say that carbon pricing leads to “efficient” outcomes.

Carbon pricing provides an incentive for continuous improvement. When businesses and households pay for every tonne of pollution they release, the incentive to reduce pollution is ever-present. By comparison, a regulation may require businesses to achieve a certain level of emissions reduction and no more. For example, in the electricity sector, federal regulations require coal plants to release only 420 tonnes of CO2 per gigawatt-hour (GWh) electricity produced. Once the regulation is achieved, there is no incentive for companies like SaskPower to go further and get pollution levels down to 300 t/GWh, or 0 tonnes/GWh. Carbon pricing provides an incentive for continuous improvement.

Carbon pricing limits “rebound effects”. Let me explain. We know that one way to reduce pollution is to purchase a vehicle that is more fuel efficient. If you trade your Ford F-150 for a Ford Fiesta you can drive the same distance for half the gas. A rebound effect happens when people use the money they saved on fuel to drive twice as far, bringing pollution levels right back to where they started! A carbon price increases fuel prices and discourages this rebound effect.

Carbon pricing is the climate change policy that maximizes freedom. For every $10/tonne that the Canadian carbon price increases, gasoline costs will increase by 2.2 cents/litre. This will mean an extra $11 cents/litre at the pump when carbon prices reach $50/tonne in 2022. If you want, you can still choose to drive a Ford F-150 truck in 2022. The government will not tell you what you can or can’t drive, or what car companies can or can’t sell. You will, however, pay for the damage your tailpipe exhaust is causing.

Carbon pricing reduces government’s need for information. What kind of boiler should Mosaic install to provide steam for their potash mining operations? With a carbon price the government does not need to know. Mosaic will work to minimize their costs and will account for the cost of pollution in their decisions. When government provides a carbon price signal, companies can make their own decisions on how to best respond.

Carbon pricing provides an incentive for innovation by creating markets for clean technology. When it is costly to pollute, there are business opportunities for products that lower pollution. For example, carbon capture and storage (CCS) is a technology that only becomes economical once carbon prices reach levels of $60-$250/tonne. Green technology entrepreneurs are hungry for the new markets that carbon pricing will create.

Carbon pricing is, of course, not perfect. Those who oppose carbon pricing are justifiably concerned about how it will impact business competitiveness and energy affordability. Here are seven thoughts on ways to design a carbon pricing system that minimizes these negative impacts.

Carbon pricing increases the cost of doing business and there is a risk that companies will move to places where carbon is not priced. This is called carbon leakage and is a problem because the pollution has not disappeared, it has just moved to a pollution haven. These leakage risks can be addressed with a global carbon price. If every region in the world implemented a carbon price there would be no incentive to move to “browner” pastures. Already, 90 countries around the world, responsible for 60% of greenhouse gas emissions, have carbon pricing as part of their climate change strategies. By adopting a carbon price in Canada, we send a message to the rest of the world that it is time to move in this direction.

If a country (like the United States) refuses to introduce a carbon price, their businesses will have a competitive advantage because their energy prices will be artificially low. Countries that have a carbon price can respond by banding together in a carbon club. Countries belonging to the club can trade freely with one another. When countries outside of the club try to sell their artificially low-cost products abroad they will be hit with a carbon border tax. This would increase the price of the exported products to the level they would have been if they had faced a carbon price at home. French President Macron recently suggested that the European Union take this approach. Trade agreements can be written to ensure carbon has a price.

Before the carbon club comes into place, carbon pricing can be designed to ensure that businesses that trade in world markets maintain their competitiveness. The federal government’s “output based allocation” system seeks to do this. Targets will be set in terms of how much pollution can be released for every dollar of production. For example, Regina-based steel company Evraz might need to reduce its emissions from 1 tonne CO2 per tonne of steel produced to .75 tonnes CO2 per tonne of steel. Evraz would pay a carbon levy only if the company does not meet its emission intensity targets, and then only on pollution above the target level. So if it produced 280,000 tonnes of steel, it would have a target of 210,000 tonnes of CO2 emissions (75% of 280,000). If it instead released 215,000 tonnes of CO2 (as it did in 2015), it would need to pay a $50,000 carbon cost (5000 tonnes x $10/tonne) instead of a potential $2.15 million cost (215,000 tonnes x $10/tonne). The incentive to reduce CO2 remains, but the cost of failing to meet the target is reduced, which ensures that Evraz can continue to compete in world markets.

Carbon pricing provides revenues that can be used to help those who struggle to pay for higher energy costs. For example, Alberta offers a means-tested rebate that ensures that households earning less than $95,000/year receive as much money back in rebates as they would likely spend due to higher fuel costs. Wealthier households don’t receive a rebate, but they are also well positioned to pay higher fuel costs and make the investments needed to reduce energy use.

Some argue that carbon pricing is simply a “tax grab” by government. Carbon pricing is not a tax-grab if revenues are returned to citizens. British Columbia has legislated that their carbon tax must be “revenue-neutral”. This means all revenues collected from their carbon tax must be returned to citizens. Since 2008 they have used their carbon tax revenues to lower income taxes and offer grants to rural and northern households. This approach offers a double-dividend. First, it discourages something we want less of: pollution. Second, it lowers a tax on something we want more of: people working. In Saskatchewan, if all carbon tax revenues in 2022 were returned in the form of tax cuts the province could decide to nearly eliminate personal income tax or eliminate the PST. Would you be willing to pay an extra 11 cents/litre at the gas station in exchange for a break on your income taxes?

In Saskatchewan, there are concerns that agricultural producers will be hit hard by carbon pricing. One thing to keep in mind is that most carbon pricing systems in Canada, for better or worse, exclude farm fuels (formerly known as “purple gas”). One argument made in favour of excluding these fuels is that farms do not have many good options for reducing fuel use. We should, however, not overlook the ability of the agricultural sector to innovate. Saskatchewan equipment manufacturers are creating autonomous technology that promises to revolutionize agriculture. Pairing autonomous technology with electric tractor motors could eliminate diesel fuel use in agriculture. If this technology is more expensive than conventional equipment today, we can ask, at what carbon price would it become economically viable?

Beyond fuel use, farm fertilizers and manure release nitrous oxide (N2O) to the atmosphere and cow burps release methane (CH4) (see picture below). Both are powerful greenhouse gas emissions that trap heat more effectively than carbon dioxide (CO2). To create incentives to reduce these emissions, carbon pricing can be applied to nitrous oxide and methane in terms of their ‘carbon dioxide equivalent’ ratings (multiply nitrous oxide by 298 and methane by 25 to convert to CO2 equivalent). On the other side of the ledger, certain farm practices can store carbon in agricultural soils. An assessment of any given farm operation would need to consider both the release of pollution like CO2, N2O, and CH4 and the capture of CO2 in the soil. Pricing would act as a way to encourage agricultural operations to store more carbon and to reduce CO2, N2O and CH4 pollution. To minimize the economic impact on the agricultural sector, pollution pricing could be made “sector-neutral”. This would mean money paid for emissions of CO2, N2O and CH4 could be awarded to producers who store carbon in their well-managed pastures, protected wetlands, or farm fields. Producers using the best practices would earn extra money for their efforts.

The federal government requires Saskatchewan to have a carbon price of $10/tonne in place by January 1,2018 (update: January 1st may not be a hard deadline for Saskatchewan to have a carbon pricing system in place. See this article). If Saskatchewan fails to implement their own carbon price, the federal government can impose their “backstop” carbon pricing plan. This means the Saskatchewan government will have given up the ability to influence the design of carbon pricing in Saskatchewan.

With the ten arguments for carbon pricing listed above, and the seven ideas for how to avoid negative impacts to trade-exposed industries, low-income households, and the agricultural sector, the only question remaining is: what are we waiting for?

IntroductionThe Saskatchewan government released a Climate Change White Paper on October 18th, 2016. The paper is positioned as an “alternative approach to Prime Minister Trudeau’s national carbon tax.”

It is no secret that the Saskatchewan government is strongly opposed to a national carbon price. In the press release accompanying the report Premier Wall asserts, “Make no mistake – a carbon tax will harm Saskatchewan.”

The Saskatchewan government believes that “talk about a carbon tax and cap and trade is the wrong conversation to be having” in Canada and seeks to shift the national conversation to “one that has a global perspective and a focus on innovation.”

But for this White Paper to truly shift the conversation on carbon pricing in Canada one would imagine it must do two of three things:

In support of this “resounding no” to Saskatchewan’s questions, the White Paper cites a blog post by CCPA economist Marc Lee and a Policy Options article by SFU economist Mark Jaccard. Let’s take a closer look at both of their arguments.

In his blog post, Lee argues that the effectiveness of the BC carbon tax has been “overstated by people who love carbon taxes.” His analysis looks at trends in average emissions per capita and he finds that emissions in BC have not decreased substantially with the introduction of the tax. Lee doesn’t, however, conduct a controlled econometric analysis to ask – holding other factors constant – has the carbon tax had an effect on BC emissions?

Other researchers have conducted careful economic analysis to understand the impact of the BC carbon tax. The New York Time article quoted in the White Paper contains a link to this research paper by Brian Murray and Nicholas Rivers. Summarizing several studies of BC’s carbon tax, Murray and Rivers (2015) offer a nuancedyes to Saskatchewan’s two important questions:

“Empirical and simulation models suggest that the (carbon) tax has reduced emissions in the province by between 5% and 15% since being implemented. At the same time, models show that the tax has had negligible effects on the aggregate economy, despite some evidence that certain emissions-intensive sectors face challenges”
(Murray and Rivers, 2015)

Lee’s post is far from the smoking gun Saskatchewan needs to make its case against carbon pricing. It does not prove the carbon tax ineffective and Lee himself is not against carbon pricing. Instead, Lee writes (in the same blog post), “A well-designed carbon tax can be the engine of a green industrial revolution” and, “To be truly effective, carbon taxes will need to be much higher than BC’s current rates”.

Mark Jaccard’s Policy Options article offers a different perspective. As of late, Jaccard has taken the position that carbon pricing is unlikely to be politically popular. Jaccard has never once argued that carbon pricing is ineffective, only that it might displease voters. Here is an excerpt from the Jaccard Policy Options article cited in the Saskatchewan White Paper:

“The reality is that significant emissions reductions will happen only if we rapidly switch to zero- and partially-zero-emissions technologies. Fortunately, these are now commercially available. But they won’t be widely adopted unless technologies that burn coal, oil and natural gas are phased out by regulations or made costly to operate by carbon pricing. The latter can be either a carbon tax, as in British Columbia, or the price of tradable CO2 permits under an emissions cap, as in Quebec.

Most important of all, Trudeau must understand that relying solely on one of these two forms of carbon pricing to achieve even the seemingly modest Harper target may cost him his job. While carbon pricing has become a mantra for economists, environmentalists, academics, celebrities, media pundits and even corporate heads, none of these people needs to get reelected. For politicians with survival instincts, it’s a different game.”

This is not an argument against the effectiveness of carbon pricing. Instead it is free political advice for Justin Trudeau.

Since that February Policy Options paper Jaccard has continued to build on his political acceptability argument. In a recent working paper with co-authors Mikela Hein and Tiffany Vass, Jaccard argues that flexible regulations can achieve reductions at a lower political cost than carbon pricing.

Canadian Carbon Pricing Proposals and Policies

Using carbon pricing alone Jaccard et al (2016) calculate that Canada would require a price of $160/tonne CO2 to meet the 2030 reduction target. An alternative would be to use a suite of “flexible regulations” such as a partial-zero-emission-vehicle standard for personal vehicles, zero-emission transit vehicles, performance standards for industry, a nation-wide coal phase-out by 2030 (save for plants with carbon capture and storage – CCS), and a requirement that thermal provinces achieve 90% emissions-free electricity by 2030. With these flexible regulations the carbon price would only need to escalate to $40/tonne by 2030 (the Jaccard et al. line in the figure above).

These flexible regulations impose costs, but, so the Jaccard theory goes, these costs can be buried out of sight of the electorate.

Saskatchewan has experience with the cost of regulations. The province recently responded to the federal coal-fired electricity regulation by equipping the Boundary Dam III coal plant with carbon capture and storage (CCS) technology. There was a hefty price-tag: $1.5 billion for 110 Megawatts of electricity capacity. A quick calculation reveals that the cost of using CCS to meet the federal regulation implies a carbon price of $60/tonne CO2e relative to a new conventional coal plant (see table below).

The Cost of the CCS Response to the Federal Coal-Fired Regulation(author’s calculations)

Will voters notice the increase to their electricity bills any less when it is caused by regulation? Maybe. But it still does not make the argument that carbon pricing is ineffective.

As Jaccard et al (2016) write, flexible regulations “will be less economically efficient” than carbon pricing. This means that we will pay more for emissions reductions achieved with flexible regulations than we would for reductions achieved with a carbon pricing policy. The career-minded politician would just have to hope the voters won’t notice…

As evidence of harm, the White Paper presents a chart showing how much each sector would have to pay under a $50/tonne carbon tax (see chart below). Adding the totals together, the White Paper estimates $2.5 billion worth of carbon charges in Saskatchewan.

But if $2.5 billion in carbon taxation is collected in Saskatchewan where does this money go? Not to the federal government. They have promised to leave all of the carbon revenues with the provinces. So, unless the Saskatchewan government burns the cash on the front steps of the legislative building, they would have $2.5 billion to spend.

How should this carbon revenue be used?

If Saskatchewan took a fee-and-dividend approach, the government could send a $2172 cheque to every woman, man and child in the province.

If Saskatchewan wanted to take a double-dividend approach, it could reduce taxes by 36% across the board (the total forecast tax revenue from personal, corporate, sales, and property tax is $6.9 billion for 2016-17).

If the province wanted to fill in the estimated $454 million deficit it could do so.

Or the province could give the money right back to the companies and individuals paying the tax. In the chart above, SaskPower pays $757 million/year for carbon emissions in the electricity sector. If this money went right back to SaskPower, in two years it would have the $1.5 billion required to pay for Boundary Dam III. In two more years it would have another $1.5 billion. What investments could SaskPower make in the following years to reduce its emissions? How much energy conservation could be achieved with a $750 million budget for conservation initiatives?

More strategically, Saskatchewan could use some of the revenues to address competitiveness issues for ‘emissions-intensive, trade-exposed’ (EITE) industries like potash, agriculture, and oil and gas. In his Op-Ed to the Globe and Mail Premier Wall notes that “Saskatchewan has a disproportionate share of Canada’s trade-exposed industrial sectors.” A report from the Ecofiscal Commission confirms that Saskatchewan’s emissions-intensive industries are more trade-exposed than other provinces (see figure below). One idea from the EcoFiscal commission is to offer output rebates to these EITE industries. The right incentives are then in place to maintain competitiveness; companies must pay for their emissions, but are rewarded for their output.

These are just options for spending the revenue from a carbon tax. But the federal government has not prescribed a carbon tax; they are introducing a national carbon price. Ontario and Quebec meet the carbon price requirement with their cap-and-trade systems. In their report for Clean Prosperity, Chris Bataille and Dave Sawyer model the possibility of Saskatchewan meeting the national carbon price with a hybrid system that would include a carbon tax on buildings, transport and light industry, and a “nationally tradeable intensity standard and output-based allocations (OBA) for the EITE (trade-exposed) industries.”

An intensity standard would require trade-exposed industries to improve the emissions intensity of their output. For example, in the potash industry, GHG emissions per tonne of potash might have to decrease by 20% by 2017. If a firm fails to improve their performance they pay a fee for every tonne of GHG emissions that is above their performance target. This means trade-exposed industries don’t have to pay for every tonne of GHGs they produce, which lowers the cost of the regulation, but they have a strong incentive to achieve reductions. This is the plan neighbouring Alberta is putting into place with their Climate Leadership Plan. It is also not so different from the plan Saskatchewan introduced in 2009 with Bill 95 ‘An Act respecting the Management and Reduction of Greenhouse Gases and Adaptation to Climate Change’. Seven years after its first reading Bill 95 has still not been enacted.

In their analysis, Bataille and Sawyer find that Saskatchewan would do well under a hybrid climate policy system. GHG emissions would be reduced by 33% by 2030, and GDP would actually increase by 4.23% over the reference case (see figure below). This outcome depends on Saskatchewan hooking into a national system where industries that can beat their performance targets can then sell those credits to companies in the rest of Canada. According to Bataille and Sawyer’s model, there is low-hanging fruit to be picked in Saskatchewan, and it would be cheaper for some firms outside of the province to pay for reductions in Saskatchewan than it would be to reduce their own emissions. The resulting revenues could be an economic boost for Saskatchewan.

The White Paper presents an incomplete analysis of the impact of carbon pricing on Saskatchewan. It focuses on the costs of a carbon price without considering the beneficial uses of the revenues. It ignores the possibility of a cap-and-trade approach to carbon pricing, except to note that permit prices are low and unpredictable in the California and European markets. And it fails to explore hybrid approaches, such as the approach proposed by Bataille and Sawyer, which actually show Saskatchewan benefitting from Canadian climate action.

Very few things in life appear desirable when we focus only on the costs (why get married when a ceremony and reception will cost thousands of dollars?) A more robust analysis would outline the opportunities that carbon pricing could bring to the province.

Alternative PoliciesAt the very least, an effective White Paper should introduce captivating new ideas for reducing Saskatchewan’s emissions. Has the White Paper done so? Here is my analysis of four of the ideas proposed in the White Paper. You be the judge as to whether these are likely to shift the national conversation.

The White Paper argues that Saskatchewan exports of uranium lower global GHG emissions by replacing coal plants with nuclear power plants. Let’s accept this claim, but then let’s think through the consequences. If Saskatchewan receives 375 Mt of credit for exporting uranium, is Canada willing to own 627 Mt of GHGs from exported oil & gas? True, Saskatchewan’s oil and gas exports only account for about 100 Mt of emissions, but Alberta would then be on the hook for much of the remaining 527 Mt. Asking for credits for uranium opens a Pandora’s box of global GHG accounting issues that the Government of Saskatchewan would be wise to avoid.

(author’s calculations, see below for assumptions)

Idea 2: Sell carbon capture and storage to the world

The White Paper positions Saskatchewan as a small portion of global emissions (more on this to come), but a leader in carbon capture and storage (CCS) technology. As the White Paper asserts, “We (Saskatchewan) can help the world clean up coal-fired electricity generation as the world shifts to newer technologies” (p. 15).

This may very well be true. Equipping coal plants in China and India with CCS would reduce global emissions. It would be great if Saskatchewan could play a role in that. But what would lead these other countries to decide to introduce CCS when the technology is so expensive? The elephant in the room is a global carbon price. We can see even in Saskatchewan how carbon pricing shifts the comparable economics of electricity generation sources (see figure below). The green bars in the figure below show how a $50/tonne carbon price makes conventional coal more expensive, and improves the economics of CCS.

(Source: author’s calculations)

How can we achieve a global carbon price? At the bare minimum we would expect that wealthy countries like Canada would lead by example and adopt one first. Saskatchewan’s opposition to carbon pricing may be getting in the way of the province’s CCS export strategy.

Idea 3: The federal government leads the development of a small, modular nuclear reactor

The Saskatchewan government is an advocate of nuclear power. After the 2009 Uranium Development Partnership (UDP) consultation they backed away from the idea of building a nuclear power plant in Saskatchewan, but the dream has not died. The Saskatchewan government has since mused of building ‘small, modular nuclear reactors’ in the province. These reactors would be small enough to integrate onto the provincial grid, likely 300 megawatts (MW) or smaller. Problematically, these reactors don’t exist in commercial form. So, the White Paper asks the federal government to create one, “Saskatchewan calls on the federal government to take a leading role in a program to develop a small reactor that could be deployable in Canada and all over the world.” It is easy for a province to ask the federal government to foot the bill for a provincial priority (note: this ‘cap-in-hand’ policy is materially different from a ‘cap-and-trade’ policy). But how much would the development of this reactor cost? And didn’t the federal government divest from Atomic Energy Corporation Limited (AECL) in 2011 to cut its losses in this area? Saskatchewan has paid a high price to pioneer CCS technology. Does Saskatchewan (or Canada) want to play the Guinea pig for a second, capital-intensive power generation technology?

Idea 4: Saskatchewan is a small contributor to global emissions

The White Paper states, “that Canada’s national emissions represent less than two percent of the global total.” The figure below, featured in the accompanying press release, emphasizes Saskatchewan’s relatively small contribution to global emissions reduction efforts by comparing Saskatchewan’s reduction target to emissions from 2400 planned coal plants.

As noted above, part of the province’s argument is that CCS can help reduce coal emissions around the globe. But, another strategic aspect of the image above is to drive home the point that Saskatchewan is a small contributor to a global problem.

This is less a policy idea and more of a way of re-framing Saskatchewan’s responsibilities. But, it is possible to generate a similarly uneven looking chart with a very different frame. The figure below illustrates Saskatchewan’s contribution to global emissions relative to our population (per capita GHG emissions). In this chart we see that Canada’s share of global emissions is four times higher than its share of the world’s population. Saskatchewan’s share of GHGs is over 13 times higher than its share of population. This provides an international fairness argument for Canada and Saskatchewan taking strong action to reduce GHG emissions at home. We are polluting beyond our fair share.

There is also a more important reason for reducing GHG emissions at home. In a recent column, Andrew Coyne reminds us that climate change is a “collective action problem.” Climate change affects everyone, but it may be tempting for some regions to “free-ride” on the GHG reduction efforts of others. Imagine a potluck supper, and you show up without a dish of your own. You are a “free-rider” and enjoy the meal without any effort. Now, of course, if all guests showed up without a dish, there would be no supper.

Global GHG reduction is like this imagined potluck. For it to work, everyone has to bring a dish to the table. The Paris Agreement was a first step in this direction. To stretch the metaphor, countries around the world decided there will be a potluck; they committed to reduce emissions to keep warming below 2 degrees Celsius. It is now up to every country, and every province, to get in the kitchen and get cooking on emission reductions.

Missing PoliciesDespite coming in at 53 pages, the White Paper is nearly silent on transportation emissions. This is a big oversight. Transportation emissions are a large and growing part of Saskatchewan’s emissions profile. Depending on how you divide them up, transportation emissions may actually be the largest source of GHGs in the province (see black bars in figure below).

(Source: Environment Canada, National Inventory Report 2015)

Some of the increase may be due to population growth in Saskatchewan, but transportation emissions have also increased substantially in per capita terms.

As noted above, the paper by Antweiler and Gulati credited BC’s carbon tax for reducing gasoline consumption and improving fleet efficiency by encouraging people to purchase more fuel efficient vehicles. The trend in Saskatchewan has been for drivers to purchase trucks and SUVs (see figure below). Just take a look around during your morning commute and ponder how many people now drive SUVs and large trucks. There has been a sea change in transportation choices in the past fifteen years.

(Source: Statistics Canada CANSIM 079-0003)

For every $10/tonne added to a national carbon price, gasoline prices go up by a little over 2 cents/litre. When the $50/tonne price floor comes into place in 2022, gasoline prices will have increased by 11 cents/litre. This may not seem like a lot; gasoline prices recently jumped by 7 cents/litre in one day due to market forces. But researchers Schaufele and Rivers (2013) have found that price increases due to carbon pricing are more “salient” to drivers. By studying reactions to BC’s carbon tax, Shaufele and Rivers (2013) found that, despite a lock-in to daily commutes and habits, drivers in BC found ways to reduce gas consumption in the short-term.

There is also a mental shift that occurs when we realize prices will continue to creep upwards, slowly, over time. As Antweiler and Gulati (2016) found, in the medium-term, when it comes time to purchase a new vehicle, a carbon tax will lead drivers to shift their purchase decisions and choose vehicles that are more fuel efficient.

The evidence from BC’s experience is clear; a carbon tax reduces transportation emissions. The White Paper failed to spell out how emissions from transportation will be reduced in Saskatchewan, and its credibility suffers because of the omission.

ConclusionAs the very least the White Paper is a clarification of the Saskatchewan government’s thinking on climate policy. On the positive side, the White Paper offers strong words on the need to reduce greenhouse gas emissions, “There is no doubt that the cost of inaction is far greater than the cost of smart, effective actions that actually reduce greenhouse gasses (GHGs)” (p. 4). Clearly, there is more work to be done to convince the Saskatchewan government that carbon pricing qualifies as one of these smart, effective actions.

So how do we move forward from here?

Rather than changing the conversation in Canada, perhaps it is best to think of the White Paper as the start of a conversation in Saskatchewan. Next door, Alberta developed a climate policy supported by industry and environmental groups alike. They invited a panel of experts to gather information, and conducted a provincial consultation. The result was the Climate Leadership Report.

It would be commendable to see the Government of Saskatchewan convene a Climate Leadership Panel in Saskatchewan. This panel would produce a fulsome review of the literature on carbon pricing, hybrid performance standards, and flexible regulations. It would model and quantify the likely GHG and GDP implications of the policies. And it would provide a suite of options for reducing emissions in the province. The panel would engage with citizens, businesses, and industry to understand their concerns and to seek out their ideas. It would produce a report, a green-and-white paper perhaps, outlining how Saskatchewan will reduce emissions and protect its economy. That would indeed be something to shift the national conversation.